BBC director-general began tonight's James MacTaggart Memorial Lecture asking one deceptively simple question: "What are the ingredients of a classic MacTaggart?"

Mark Thompson: 'You really shouldn't encourage James [Murdoch]'

You need anger. If you can manage it, rage – though I have to say no one's ever going to match Dennis Potter not just for eloquence and passion, but for sheer undiluted bile.

You need a villain. If you study all the best MacTaggarts, there's always a proper, black-hearted villain. Sometimes the villain is called Murdoch – though, fascinatingly never when the lecturer is called Murdoch himself. Occasionally, some would say not often enough, it's Ed Richards. Once – we have Peter Bazalgette to thank for this one – the Professor Moriarty of British television turned out to be Lady Elspeth Howe and the Broadcasting Standards Commission. I bet the audience were really quaking in their boots that year.

But of course we all know who the usual suspect is. Time and again when the MacTaggart lecturer comes to that fateful moment – the J'accuse moment – when they must point the finger, time and again they choose the BBC. This isn't just BBC employees, by the way, it's other people too.

Should I follow in that honourable tradition? I guess you'll just have to sit back and wait to find out.

So what else do you need? Proposals of course. Improbable, unworkable, wholly self-serving, yes – but uttered in the certain knowledge that by the end of the weekend they'll be long forgotten and the only thing people will remember is the nasty things you said about the BBC.

Finally – and this is the mark of true class – if you can, you should find a way to insult your audience. Remember James last year? He told you that you were the "Addams family of world media". And, this being the British TV industry, there were quite a few people in the hall nodding wisely and thinking, "Yes of course, you're so right James, thank you for saying so."

You know you really shouldn't encourage James. He was so pleased with his attack on the BBC here that a few months later he decided to sink his teeth into another of those sinister forces that lurks in the undergrowth of our national life. Yes, the British Library.

Do you know what they do at the British Library? They gather books together and then encourage people to come in and read them for free. The sick bastards. Now they were proposing to put their newspaper archive online and were daring to ask some users to pay a small charge. Outrageous.

Who knows where he'll strike next. The British Army? The British Cheese Awards?

Well, I'm afraid I haven't got any of that for you this evening.

I don't believe that the British way of doing TV is the worst in the world or that it's "unhappy in every way" and, to be honest, I think it's faintly silly to pretend that it is.

I don't believe it's threatened by pantomime villains or that the young people of today no longer understand the values of great public service broadcasting or any of the other negative, defeatist theories that are peddled about our industry.

I don't believe that decline – creative, financial, institutional decline, above all, a decline in the quality of British television – is inevitable.

In fact, I believe that the real dirty little secret about British television is about how good it is, not how bad.

It still has access to extraordinary reservoirs of British talent. It's still capable of real creative courage. It still produces some of the highest quality television and radio made anywhere.

It's not that we don't face issues. The impact of digital on audiences and business models. The need for further large scale reform across the industry – not least inside the BBC. And perhaps the biggest of all: the looming short-fall in the amount of money available to invest in original British production.

But these are issues which are more likely to be solved by collaboration and united action than by amateur dramatics. And they shouldn't blind us to the central fact – which is that broadcasting is a British success story and, now the barriers to entry for British TV are falling around the globe, that we have a real chance of making it a creative and economic world-beater.

There is a battle going on – a battle for quality, and for the culture and the conviction and, yes, the money that makes that quality possible. It's going to need investment, creative focus, the right digital strategies. It's going to need Britain's broadcasters to break the habit of a lifetime and actually work together.

But it's not a battle which will be decided by the number of early evening regional news magazines you can watch in Northants or by the finer points – endlessly fascinating though some people clearly find them – of the governance of the BBC.

Over the past decade we've wasted vast quantities of breath on topics which, if you just step a couple of paces back, look almost comically parochial.

Remember Edinburgh last year? A crisis in regional news. A funding gap at 4. Leadership vacuums at ITV and 4. Channel Five on its uppers. Top-slicing a racing certainty.

All gone. What a difference 12 months make. The IFNCs are dead. ITV is talking up, not down, the importance of a quality news service. The new leaders of Channel 4 aren't looking for public money – they want to make their own way in the world. Top-slicing is firmly off the agenda.

And, as for Five, well I don't think I can do better than the Daily Express: "Great New Era For British Television" was how they greeted Richard Desmond's purchase of the channel. I must say it's nice to see a newspaper being positive about TV for a change.

We have, don't we, a kind of genius in our industry for talking ourselves into a crisis – and then of always being somehow disappointed when the crisis turns out to be imaginary or when the cyclical turns out to be just that, cyclical.

Instead we should concentrate on what matters most and on the issues and actions that could actually make a difference. We should think big, not small.

Better than we think

But we're so good at talking down our own industry that the proposition that British television is any good at all is itself rather novel. So let's begin by hearing the British public on the subject.

This summer several hundred Brits who'd been overseas recently were asked how they rated different aspects of quality of life here compared with other countries.

To be honest, they're not over-generous in their marking. Weather, scenery, customer service, food: all worse in Britain. Public transport, neck and neck. Apparently toilets and driving remain strengths, not necessarily at the same time by the way. But of all the topics covered in a survey this summer, it was British TV that scored the highest. 62 per cent of a sample of British adults who had watched TV abroad as well as in the UK said they thought television was better here; only 8 per cent took the opposite view.

I'm not suggesting for a moment that the British public think that TV is perfect – far from it. One of the reasons that TV in this country has developed in the way it has is precisely because we have such a critical, impatient audience.

They want the best and they want it all year round, which is why nowadays at the BBC we play pieces like Sherlock, The Normans and Rev in high summer.

And although we wouldn't be British if we didn't sometimes hark back to the golden programmes of yesteryear, the truth is that, programme for programme, measured appreciation for TV today is at a high; that overall television viewing is up despite the many competing claims on people's attention; and that the public have lapped up the iPlayer and services like it because they know there are programmes of real quality and value out there.

And so do international audiences. The global reputation of British broadcasting is as strong today as it's ever been – if not stronger.

That global reputation was built first and foremost by journalism – by the BBC World Service and Global News, but also by a tradition of outstanding news, current affairs and documentary which stretches far beyond the BBC to include ITN, ITV, Channel 4 and Sky.

It's a different story today. Factual programmes and formats of every kind. Entertainment – Millionaire, X Factor, Dancing With The Stars – playing to many tens of millions of viewers. And, while it's fashionable in this country to claim that all the best comedy and drama is actually American, over in America British comedy and drama are beginning to make serious inroads.

The appetite is there. BBC Worldwide has over 1,000 episodes of BBC TV programmes up on the US iTunes site. The site's interesting because, unlike much of the American distribution landscape, it's a level playing field. Today, competing with the biggest American players, the BBC is a top 10 provider of programmes in the TV section of iTunes.

And of course it's not just the BBC. ITV, Wall To Wall, RDF, Celador, Shine, and many others. British talent, British companies, British ideas are no longer strangers in town in LA and the world's other media capitals. Some 15 per cent of the UK indie sector's revenues already come from overseas. The opportunity in the future should be even greater.

At the BBC, we want to rise to the challenge. Within a year we aim to launch an international commercial version of the iPlayer. Subject to Trust approval, we also want to find a way of letting UK licence payers and servicemen and servicewomen use a version of the UK BBC iPlayer wherever they are in the world.

But we shouldn't delude ourselves about how much would have to change if British TV was to be a real economic success story around the world.

Unlike almost every other country in the world other than the US, the UK is a net exporter of television services – but the scale is still pretty small. In 2008, UK net exports of TV services were just under £200 million. Management consultancy was over six times as much, computer services 18 times as much. And please don't ask about the banks.

And that small net export figure is because today we have an industry which is mainly focused on its home market, with programme and channel brands many of which are unknown in the rest of the world. Who is the competition in these global markets? Disney, Time Warner, News Corporation. If we don't invest and organise for success – not on the basis of one format here, one comedy script there, but as an industry – we will remain what we are today: a very talented minnow. Now is the moment to put that right.

A unique funding model

But the only reason we can even have this conversation, can credibly believe that our TV could delight global audiences and drive far much more international revenue than it does today is because of the way television works here in the UK.

The reason British TV produces exceptional results is because the system itself is exceptional in four ways. Call them our four pillars.

The first pillar is the mixed funding model that has allowed us to invest far more per head of population in original production than any comparable country – more than three times as much as countries like Italy and Spain and more than twice as much as countries like Germany and France. It's really only the US which spends more than we do.

It's this exceptional investment that has made the whole equation possible: originations throughout the year; a burgeoning independent sector as well as significant in-house production at the BBC and ITV; a world-class concentration of TV and radio production in London, but sustainable masses of network production here in Scotland, in the other nations, in Salford – where we are building a visionary new broadcast and production centre – and in other major cities.

Exceptional per capita investment in new production has meant that we have a far bigger position in the most expensive forms of TV – original drama, comedy and landmark factual – than any comparable nation. It is not a sufficient condition for producing the best TV in the world, but it is a necessary one.

As everyone knows, much of that investment derives from direct and indirect public intervention. Free market purists claim that, if you reduced or eliminated this intervention, the market would simply fill the gap. But look around the world. You will find there are plenty of countries where public intervention is on the wane – licence fees cut, public broadcasters in decline – but in no country anywhere has the market stepped up to replace the lost programme investment.

In a year or so's time, there will be a debate about the future level of the licence fee. The Government will quite properly want to look at many things – public attitudes, value for money, the views of the rest of UK media – and many arguments will be made. For the BBC, I believe this will be a moment for realism and a recognition of the scale of the challenge facing licence payers and the country as a whole.

But do not believe anyone who claims that cutting the licence fee is a way of growing the creative economy or that the loss in programme investment which would follow a substantial reduction in the BBC's funding could be magically made up from somewhere else.

It just wouldn't happen. A pound out of the commissioning budget of the BBC is a pound out of the UK creative economy. Once gone, it will be gone forever.

The culture of British TV and the idea of public space

Funding and the economics of original production are critical. But British exceptionalism in TV doesn't just depend on a tradition of unusually heavy and consistent investment. It stands on a second pillar, which is a broadcasting culture which is also very different from other countries.

We have an audience who are not just critically astute but hungry for fresh ideas. We still have programme-makers and broadcast institutions with a very particular strain of public service broadcasting pulsing through their arteries.

It's the opposite of that dry and lifeless view of public broadcasting which is prevalent in America and elsewhere and which holds that it must never ever include programmes which significant numbers of people might actually want to watch or listen to.

At its best, British public service broadcasting wants to share the best with everyone. It wants to take topics or themes which may seem abstruse or unapproachable – the science of the solar system, what you can learn about civilisation through physical artefacts – and then bring them to life with such conviction and creativity that they reach deep across a society.

Cultural pessimists are always trying to convince us that this great tradition – the tradition epitomised by James MacTaggart by the way – is dead and that all the BBC and the other UK PSBs care about nowadays is sensation and ratings-chasing.

What nonsense. Not only is it alive and well, some of the best public service broadcasting there has ever been is being commissioned and made today.

In more than 80 years, the BBC has never made a better, more insightful, more educational programme about opera than the one we showed a few months ago – Tony Pappano's Opera Italia.

The tradition has always embraced popular forms as well as more demanding ones. And, although services like BBC One are far more distinctive, to use the jargon, than they used to be – more origination, much less acquisition, more news, drama, documentary, less entertainment than in the past – offering quality entertainment, especially on a Saturday, remains one of the key things the British public expect of us.

On the Tuesday after the General Election, over 17 million viewers joined us on BBC One that evening to see events unfold – Gordon Brown's resignation speech, David Cameron's visit to the palace, the formation of the new government. They came because there is still a very strong instinct in this country to come together through broadcasting to share great national moments – something which only free-to-air broadcasting can make possible.

They also came to BBC One because, along with ITV1, it remains one of the nation's front rooms. People go there when major events happen – elections, state occasions, the biggest sporting moments – because they are used to going there. In large measure, that's because of the popular programmes, the soaps, popular dramas and entertainment programmes which, in their own way, also chronicle and celebrate our national life and culture.

The enemies of public service broadcasting always want to atomise it, to split so-called market failure genres which may deserve public funds from so-called commercial ones which definitely don't. They say it's all about the programmes.

Well, yes and no. The clue actually is in the title – public service broadcasting. It's about services as well as individual programmes. At its best public service broadcasting is woven of whole cloth.

And, just like the wicked old British Library, it's founded on the idea of public space – in other words on the belief that there is room for a place which is neither part of government or the state nor purely governed by commercial transactions, which everyone is free to enter and within which they can encounter culture, education, debate, where they can share and swap experiences.

In that fiery MacTaggart lecture back in 1993, Dennis Potter connected public service broadcasting with a belief in the possibility of a common culture. One that could transcend differences of class, wealth, geography, identity. One that would not segregate the public into attractive high-revenue households and the rest. One that would not put anyone on the wrong side of an encryption wall. One that would treat everyone as being of equal value.

That's what we mean when we talk about public space. Not programmes commissioned and produced either to appeal only to a cultural elite or to bring in the biggest possible commercial audiences. But programmes that provoke the mind, challenge and inspire. Programmes that are open to all.

A tradition of independence

As well as funding and public service culture, there's a third pillar on which British exceptionalism in broadcasting rests – which is a long and staunch history of editorial independence from political and commercial influence.

This independence has every bit as fiercely defended by the commercially-funded PSBs as by the BBC – think of Thames and Death On The Rock – and it is what makes possible the impartiality in and beyond the news, which British audiences prize and which is the envy of the world.

At the moment – and despite the anxieties expressed over the past year – this independence seems secure. The new coalition government has been explicit in supporting the independence of the BBC and the charter which underpins that independence. Beyond that, the cross-party support which has sustained the independence of the whole British broadcasting system appears as strong as ever.

But we should remain vigilant.

The same commercial and political forces which are undermining the independence of the public broadcasters in other European countries – Italy and France spring to mind – are at work here as well.

In the UK, they know that a frontal assault will fail, so they adopt different tactics. Exaggerated claims about waste and inefficiency. Nit-picking about the detailed mechanisms of governance and accountability. Even some – not all, but some of the calls for greater transparency.

Openness is as important for the BBC and the other publicly-owned PSBs as for any other public institutions. But sometimes calls for transparency turn out to be a cloak for something else.

In Italy, politicians are threatening to insist that RAI, the public broadcaster, should disclose the amounts it pays to individual artists in end-credits of programmes. I have to say that it's an honest dialogue in that country as everyone in Italy knows that this proposal has nothing to do with the public interest or real accountability and everything to do with an agenda of weakening and undermining the public broadcaster.

In the UK, the tactics are usually subtler, the language loftier. Too often the underlying purpose is the same.

The fourth pillar

But there's one last pillar which underpins our system. Indeed, this fourth pillar underpins the other three, underpins everything. It's the abiding support of the British public.

Without their support – I don't mean historical support, I mean living support today – there would be no licence fee, no BBC, no Channel 4 certainly its present form, and the rest of broadcasting would look much like it is in most other countries.

But that's not what the British public want. Support for the licence-fee is as high, if not higher, today than it was when Alan Peacock wrote his report on the future of broadcasting for Margaret Thatcher in the 1980s. Then there were four channels. Now there are hundreds and hundreds.

But perhaps when Britain is fully digital, then the British public will no longer be prepared to pay. This was the claim of a recent report from the Adam Smith Institute.

What the Adam Smith Institute forgets is that over 90 per cent of UK households already have digital television today, more than 70 per cent already have broadband. In other words, they're already living in a digital Britain – yet their support for the licence fee is higher than it was in analogue households 25 years ago.

The purists have spent a generation making the free market case for abolishing the licence fee and the British public agrees with them less now than they did when they started. Nor is there any evidence that the public has the slightest bit of enthusiasm for the privatisation of Channel 4, the Arts Council of the Air or any of the other schemes which the hardliners have come up with over the years.

But of course you wouldn't know any of this if you based your assessment of public attitudes to British broadcasting on the evidence of most of the UK's national newspapers.

Systematic press attacks on broadcasters, and especially on the BBC, are nothing new of course – the first organised hostile campaigns began back in John Reith's day – but the scale and intensity of the current assaults does feel different.

You can get an idea of the intellectual weight of some of the attacks from the Freedom of Information requests we get in. At the BBC, we believe in FOI as journalists and as a public body we believe we should be as open as we can be. But I have to say it's still painful to spend public money that could be invested on programmes answering weighty questions like - all these are real by the way:

How many toilets do you have in Television Centre and how many accidents take place in them each year?

What's your policy on biscuits?

And does Gordon Brewer have two fully-functioning ears?

He does, by the way.

Often the reporters freely admit to us that they know the story they're working on is going to be ramped up, distorted or just plain nonsense.

But as one journalist from a broadsheet said to one of my colleagues recently: "It doesn't matter about the facts, they just want to trash you."

Now that's what I call refreshing honesty. Not the public interest. Not accountability. "We just want to trash you."

So what's the effect of all this relentless negativity? Sometimes it clearly affects the political debate about broadcasting, not least because there are occasions when politicians of all parties find it very hard to resist an easy headline. "I only give the tabloids one negative quote about the BBC per week," one MP told me proudly the other day.

But the interesting thing is there's no evidence that any of this is affecting public attitudes to the BBC at all. Overall approval for the BBC and value for money scores are solid and high, scores for quality and originality are going up.

And that's true even of the readers of those papers which are most consistently hostile about the BBC. Across the UK population, 71 per cent of people say they're glad the BBC exists. Among readers of the Daily Mail, it's 74 per cent. The Telegraph, 82 per cent. The Times, 83 per cent. The Sunday Times, 85 per cent.

Not only do these newspapers fail to reflect the view of the majority of the British public about the BBC. They don't even seem to reflect the view of the majority of their own readers.

So what's going on? Why is that the case?

I believe it's because those readers are able to compare what they read about the BBC with their own experience of the BBC's services week in, week out.

Each day the British public switches on, or switches over to the BBC some 175 million times across TV, radio and the web. And they wouldn't do this – given all the competition available – if they didn't love what we were making. Those daily choices are the benchmark against which the public judge press stories and leaders about the BBC.

They are the foundation of something rather rare in British life – a relationship which is not mediated or controlled by newspaper proprietors or politicians or anyone else. A relationship which is simple and direct – and which is therefore very strong.

The right debate

But if three of the pillars of the system – public support, political independence and public service culture – all feel relatively secure, the same can't be said for our mixed funding model. And the problem is real and immediate.

It's this: the total pot of money available in the UK to invest in original TV production is shrinking and may shrink further. The danger is not only that UK producers, many of whom are in this room, and UK audiences will suffer, but that – at the very moment when the opportunities for British talent around the world are greater than they've ever been – we will miss a historic opportunity.

It's happening because the broadcasters who have traditionally been the biggest investors in original British TV beyond the BBC are fishing in a stagnant or declining pool of advertising. With new creative strategies and business models, or unless other players or other solutions appear, the total amount of money for new talent and new ideas and for the UK's exceptional independent sector, is likely to reduce further.

Between 2004 and today, the pot is estimated to have declined from around £2.9 billion to £2.6 billion – some £300 million out of the system.

It may be 2014 before ad revenue returns to close to 2004 levels and, even then, most analysts believe that the budget for new commissions would still be much lower in real terms than it was a decade ago.

So that's the size of it. It's not Armageddon – but given the sheer quantity of talent we have in our industry, given our global competitive advantage, it would be tragic if we just stood around and waited for it to happen.

And yet that's exactly the assumption on which the recent debate about the future of public service broadcasting has been predicated – that we must just accept the decline of the money available for quality television and apportion the dwindling resource as best we can.

Why? To me, this is the question that industry leaders and policy-makers should be grappling with: not struggling with how to deal with the symptoms of a structural decline in programme investment, but identifying the steps that would put that investment back on the path of growth.

Changing the BBC

It means confronting a need for change across our industry more radical than anything we've seen before.

And at the BBC, we have to recognise that we are not somehow exempt from all of this. On the contrary, radical and rapid change inside the BBC is itself an essential part of the solution.

But we're not starting from scratch. Over the past six years, there's been massive change, thousands of jobs have gone at the BBC and overheads have been squeezed to their lowest level ever. Many of the splendid old top jobs – Director of Nations & Regions; Director, World Service – have been scrapped or merged. The support side of the BBC is a fraction of its former size and, as any in-house or indie producer will tell you, we've also borne down on programme costs as well.

Ask indies in particular how the "wasteful" BBC compares in contract negotiations with the other broadcasters.

Inside the BBC, it's been a period of necessary and often gut-wrenching change. Achieving a smaller, more efficient, more distinctive BBC is inevitably a painful and often contentious process.

Right now, we're going through one of the most painful changes of all – confronting the fact that the current pension arrangements for people inside the organisation are simply no longer affordable. I'm determined to end up with pension arrangements which meet the test of affordability in the long-term, but which are reasonable, fair and which will apply evenly across the BBC, no matter how senior or junior you are.

We're in the middle of a consultation with everyone in the BBC. If we can make adjustments to the proposals in the light of that consultation and still hit the test of affordability, we'll do it – but hit that test of affordability we must. But I don't see how anyone could look at the approach we're taking and still claim that we're not prepared to grasp serious change.

So, am I saying then that reform at the BBC is in fact nearly complete?

Far from it. This spring we published Putting Quality First. It came about because the BBC Trust, I and my senior colleagues shared a conviction that, though we've achieved a lot already, when you look at the sheer pace of change in media, when you look at the new financial context in which the BBC and the UK find themselves, there is still a massive amount to do.

So over the coming months, far from slackening, you'll see the rate of change and reform at the BBC go faster and deeper.

One of the central planks of Putting Quality First is to guarantee to spend 90% of the BBC's public service income on the task of commissioning and making great content and getting it to the public. At a time when other broadcasters are struggling to maintain their origination budgets, it's critical that the BBC spends as much of the licence fee as possible on high quality content.

But to achieve that, the BBC will have to become leaner than it's ever been before. As a proportion of spend, overheads are around half what they were in the 1990s. To hit our target, they will need to fall by at least another quarter.

Expect to see further radical change to the shape of the organisation.

Simpler structures, fewer layers, fewer management boards. We are committed to reduce senior manager numbers by a fifth by the end of next year. That's a minimum. If we can go further, we will – and we will look for reductions at every level in the organisation up to and including the Executive Board.

Expect further significant movement on executive pay. The BBC does need to compete for the right people – but we also need to recognise how much the external context has changed both in commercial media and across the public sector. By the end of next year, the total senior management paybill will reduce by at least a quarter. The actions we've already taken on pay and bonuses and a review of senior pension arrangements right now means that many of the BBC's top managers – including myself – will see their total pay fall, not by five or 10 per cent, but by much more.

Expect further reductions in top talent pay as well.

We will take the money we save by all these measures and invest it in the central mission of the BBC – which is to commission, make and distribute the best and most creative content to the British public.

Second – and this is at the heart of Putting Quality First – we have to rededicate ourselves as an organisation unswervingly to that central mission. The public want a range of programmes from the BBC, including popular ones, but they don't want a BBC which is driven at all by ratings or commercialism or by any form of competitiveness other than the urge to be the best.

So, on air and across radio and TV, the BBC needs to make a further significant shift towards distinctiveness, spending more of the licence fee on output which, without the BBC, wouldn't get made at all.

This is not a new theme. But, given the changes in the rest of the broadcasting landscape, it's right that we go further, both to protect the range and diversity of what's available to the British public, but also to create more room for other players.

Third, the BBC must do much more to support creativity across the country and to help the whole industry make the shift to digital.

Here in Scotland we're working with Creative Scotland and STV to drive the development of the creative industries in this country. It's not just fine words – BBC Scotland and STV now share content and facilities on a daily basis. We want to develop similar partnerships across the UK.

In the past couple of years, we've taken our partnerships with the UK's cultural sector to a new level. We share the same public space and we know that partnerships with shared leadership and shared creativity can transform the public's access to science, arts, knowledge. Look at Neil MacGregor's History Of The World.

We know how critical BBC technology is to platform development. Without the BBC, DTT would have failed and access to every home in the UK might either have been controlled by one satellite operator or one cable operator. Instead, there are now almost 19 million homes using Freeview. As of this year, it has high definition. Next year – through Canvas – it will have IPTV functionality.

Canvas will help us get services like iPlayer to everyone. But it will also help others and producers to find new ways of monetising content – and, by doing that, I hope encourage more investment in TV production. Canvas is also one of the key ways in which we can help deliver universal broadband take-up in the UK.

When it comes to platforms, we stand firmly on the side of open standards, plurality and choice. We want to share our breakthroughs with the rest of the industry.

Finally, the BBC needs to look hard at its own scale and scope of its services. The public don't seem to want fewer or thinner services from the BBC – indeed, as we've seen this year with 6 Music, proposals to remove even niche services can be greeted with real public dismay.

But that doesn't mean that the individual BBC services should not be tested closely to ensure they do fulfil the public purposes in the Charter. We're in the middle of a searching exercise intended to increase the focus, clarity and public service value of our website. We expect to cut its footprint on the web very substantially, to exit some editorial areas entirely and leave it to others, and to reduce the amount we spend on it by 25 per cent.

So we have a daunting programme of change at the BBC. Delivery is going to require not just the right strategies and skills, but absolute clarity about what the BBC is there to do and an extraordinary level of commitment and energy.

So can we do it? I believe we can. The passion for creativity and quality is at least as strong today as it was in the BBC I joined more than 30 years ago. The idea of public service still means something tangible and valuable – and thousands of people inside the BBC still devote their working lives to it. The public say they're proud of the BBC and I'm proud of it too. Proud of all those thousands of people – some senior, some junior, some famous, many not – who give everything to make our services what they are. I also believe we can do it because, in my experience, the BBC is far more flexible and more capable of change than it sometimes knows.

And finally you might ask, do I have the commitment and the energy to lead the BBC to where it needs to get to next?

My answer is a very clear yes. The stakes have never seemed higher – for the BBC, but also for our whole tradition of quality broadcasting and its influence here and around the world. But the prize has never seemed more precious. And I for one am up for the fight.

Changing the rest of British broadcasting

But the BBC is not the only thing that needs to change if we want a truly successful industry. If the short-fall in content investment is to be made up. If British television is to achieve its full potential, both in its home market and around the world.

We need a strong ITV and a strong Channel 4 – in other words, two more broadcasters with the resources and the institutional culture to invest substantially in great British television.

In the short-term, we need policy-makers and the competition authorities to look hard at the structure of the advertising market and the effect of the present main competition remedy, the CRR.

The UK needs a market in TV advertising which functions effectively, but it also needs to be a market in which ad-funded broadcasters can be confident enough of commercial success that they invest in quality content. Arrangements which risk a downward spiral of falling prices and disinvestment in programming will end up serving no one – not advertisers, not producers, and certainly not the British public.

Longer term, Canvas will be key, because it offers broadcasters like ITV, Channel 4 and Channel Five the chance to replace the current advertising model or augment it with one which matches advertising to consumers much more precisely and which thereby drives much greater value. Crucially, Canvas gives them the chance to develop this new model and maintain control of it themselves.

The scale and success of Britain's independent production sector points to another area of regulatory review: the way in which independent producers trade with broadcasters.

The current Terms of Trade did a good job helping to strengthen the indie sector: setting it on the path to its present success, and ending the bad old days when broadcasters held all the cards.

But the current pace of change affecting broadcasters, together with the scale and ownership of the independent sector, means it's the right time to take a fresh look at whether the current arrangements for contracting with broadcasters are fit for purpose. If we want Britain to be a world leader in TV, independent producers and broadcasters will have to work much harder together to plan the value of what is made over its whole life-cycle and across different TV markets. We definitely need more investment from the broadcasters, we may need more flexibility from the producers.

The Sky challenge

Finally, I want to turn to Sky – already Britain's biggest broadcaster by far by revenue. Sky has an annual turnover of £5.9bn, of which £4.8bn is from its core retail subscription business. That revenue line alone is £1.1 billion more than the BBC's UK public service turnover.

And all the analysts believe that Sky is going to get a lot bigger still and will end up dwarfing not just the BBC, but all the other commercial broadcasters put together. A year ago, James Murdoch fretted aloud about the lamentable dominance of the BBC. He was able to do that only by leaving Sky out of the equation altogether.

Sky is already a far more powerful commercial counterweight to the BBC than ITV ever was. It is well on its way to being the most dominant force in broadcast media in this country. Moreover, if News Corp's proposal to acquire all of the remaining shares in Sky goes through, Sky will not just be Britain's biggest broadcaster, but a full part of a company which is also dominant in national newspapers as well as one of the Britain's biggest publishers.

According to Enders Analysis, it will be a concentration of cross-media ownership which would not be allowed in the United States or Australia, News Corp's other two most important markets.

I'm not going to comment on the question of News Corp's dominance as a whole in the UK itself. That's a matter for the politicians and regulators.

But I do, however, want to talk about Sky in relation to the rest of British television.

Sky has reached its preeminence as Britain's biggest commercial broadcaster for the best of reasons. Technological innovation, a willingness to take risks, strategic flexibility, an ability to get close to and understand its customers – these are the reasons why Sky is so strong today and British TV is richer and better today because of them. And, particularly with Sky News and Sky Arts, the company has also shown a commitment to services which share many values with the BBC and the other PSBs. Sky is not the enemy of quality British Television – in fact it's an important provider of it.

But when it comes to investing in original British production, it's a different story. When ITV was the dominant commercial player in UK television, it poured money into original programming and often in key genres – like drama in the 1980s and 1990s – it did a better job than the BBC.

It's great that Sky is going to make the HBO archive of outstanding programmes available to British viewers over the next few years. It's great that they're announcing a few more drama commissions. But it's time that Sky pulled its weight by investing much, much more in British talent and British content.

Sky talks of a programming budget in the year to June 2010 of around £1.9bn, of which sports, movies and carriage fees are about £1.7bn. Sky doesn't declare its annual investment in original UK non-news, non-sport content, but the latest estimate puts it at around £100 million, not much more than Channel Five's UK origination budget, despite the fact that Sky's total turnover is more than 15 times that of Five's.

Sky's marketing budget is larger than the entire programme budget of ITV1. As a proportion of Sky's own turnover and its profits, its investment in original British content is just not enough.

People say to me: "Aren't you afraid that Sky is going to start spending more on original British programmes and will therefore be competing head-to-head with you?" But that's what should happen. It would be good for the BBC. It would be good for the industry. It would be good for the public.

Our system depends on the big commercial broadcasters backing British talent and not just backing them with occasional commissions which are then lavishly marketed, but with week in, week out investment across a wide range of programmes.

On its own, Sky could close the entire investment gap I identified earlier this evening.

And here's another idea. In Britain, you'll recall, Sky pays nothing for re-transmitting the PSB channels, despite the fact that taken together, they are by far the most watched channels they offer. On the contrary, the PSBs pay an EPG charge for the privilege of being on the satellite platform.

Let me quote from someone who thinks that those who invest in content should get a better deal: "Asking cable companies and other distribution partners to pay a small portion of the profits they make by reselling broadcast channels, the most-watched channels on their systems, will help ensure the health of the over-the-air industry in America."

The point is a simple one: it's the free-to-air US networks who invest the most in broadcast content, they're also the most popular networks in the US cable and satellite environments, so isn't it reasonable that the distributors should pay the networks a charge in return for the right to carry them?

The man who made that case is Rupert Murdoch and in America he's winning the argument – Fox is now receiving distribution fees from the cable companies.

So why not introduce re-transmission fees in this country as well?

Not for the BBC – whose services are paid for by a universal licence fee and which should be available on all platforms, in my view with no charges being levied by either party. But introducing them for those commercial public service broadcasters who invest significantly in UK production.

Just to give us a starting point, consider that Fox originally asked Time Warner for $1 a month per subscriber in exchange for the right to re-transmit the Fox network. At that level, Sky would be paying £75m a year to get the equivalent of Fox. Given the rather greater popularity of Channel 4, ITV and Channel Five, Sky could perhaps afford to be even a little bit more generous!

James may quibble with Rupert's logic. I find it curiously compelling.

Conclusion

Edinburgh is an industry event so perhaps it's inevitable that it can sometimes feel inward-looking. You've heard me say tonight that I believe the debate about broadcasting's future has also sometimes felt too inward – and too defeatist.

Yes, we need to embrace reform and change. And yes, we need to reverse the decline in programme investment. But I believe that we can achieve that and secure the other three pillars – culture, independence, public support – on which our way of broadcasting depends.

What would success look like? Strong creative and commercial revival at ITV, 4 and Channel Five. A Sky which was as proud of spending scores of millions of pounds on new British programmes as on the HBO archive. British producers succeeding in international markets, not at the expense of quality, but because of it.

And a BBC fit and ready for this new world. A BBC more clear than it has ever been about its purpose and its creative goals. A BBC where content and content investment always come first. A BBC not afraid to shed the last vestiges of its bureaucratic past. A BBC which not only leaves room for others to succeed, but does all it can to help the whole industry thrive, which doesn't just defend public space but helps it blossom.

Over the past few months, speculation about broadcasting and especially about the BBC has begun to attract the attention of the public at large. Headlines in July about the possibility of a reduction in the licence fee and big cuts in BBC services provoked an extraordinary rash of Twitter feeds, e-mail campaigns and letters to MPs. Some of those "I love the BBC" Twitter feeds trended in the top five in the whole world.

If we want a strong industry, if we want the resources and the collective will to go on producing the best television in the world, it's time for us to agree on what really matters and then to take a leaf out of the public's book.

They care about British television and, if necessary, they will be prepared to fight for it in their thousands and, who knows, perhaps their millions.

If you feel the same, if you think the battle for quality and creativity is worth winning, then now is the time for you to stand up as well and be counted. Thank you.

BBC Director-General Mark Thompson's speech at the Media Guardian Edinburgh International Television Festival on Friday 27 August 2010: James MacTaggart Memorial Lecture.